Swiss Franc falls as US Dollar gains on stronger-than-expected NFP report
- USD/CHF climbs to a two-month high after stronger-than-expected US NFP data.
- The US Dollar Index (DXY) climbs toward the 100 mark, its highest level since early April.
- The SNB can afford to stay on hold as Swiss inflation remains contained.
The Swiss Franc (CHF) weakens on Friday as the US Dollar (USD) outperforms its major peers following upbeat US labor market data. At the time of writing, USD/CHF is trading around 0.7955, climbing to a two-month high.
US Nonfarm Payrolls rose by 172K in May, more than double what markets had expected. April's payroll figures were revised higher to 179K from 115K, while the Unemployment Rate held steady at 4.3%.
The data suggests the US labor market is regaining momentum after a notable slowdown last year, which prompted the Federal Reserve (Fed) to deliver three consecutive “risk-management” rate cuts.
As the labor market stabilizes, the Fed can increasingly focus on the inflation side of its dual mandate, as price pressures remain sticky.
Meanwhile, the recent surge in Oil prices, linked to supply disruptions through the Strait of Hormuz, has accelerated inflation since the US-Iran war began in late February, pushing it further away from the central bank's 2% target.
As a result, expectations are building that the Fed will keep interest rates on hold in the coming months, or even raise them if inflation risks intensify.
According to the CME FedWatch Tool, the probability of a rate hike at the October meeting rose to 40% from 30% following the NFP report.
The hawkish repricing is also pushing the US Dollar and Treasury yields higher. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, climbs toward the 100.00 mark, a level last seen on April 7.
In Switzerland, the latest inflation data released on Thursday came in below expectations and continues to trend within the Swiss National Bank's (SNB) 0%-2% target range.
"As such, the SNB can afford to keep rates at 0.00% for some time. The swaps curve is pricing in one 25-basis-point (bps) rate hike to 0.25% over the next 12 months," according to a report from Brown Brothers Harriman (BBH).
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.